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The coming financial collapse of the U.S. government: Fed papers reveal what’s in store for Americans

by Mike Adams

The bankruptcy of the United States government has been talked about for years by independent observers. If you’ve read the book, “Empire of Debt,” then you know where the U.S. is headed financially. But most people have no idea about the ultimate financial consequences of decades of borrowing and spending by Washington, and they remain irrationally convinced that the status quo will remain intact for eternity. No one in any position of authority, you see, has yet admitted that the U.S. government is indeed going bankrupt. Until now, that is.

In a remarkable paper posted by the Federal Reserve of St. Louis, and authored by a Boston University teacher named Prof Kotlikoff, it is revealed in blunt, powerful language that the era of borrowing and spending without consequence may soon come to a close. The paper, entitled, Is the United States Bankrupt?, may not remain posted for very long once the public gets word of what it actually says.

And what, exactly, does it say? For starters, Kotlikoff explains, “Unless the United States moves quickly to fundamentally change and restrain its fiscal behavior, its bankruptcy will become a foregone conclusion.”

The country is bankrupt

He goes on to explain, “[that] the United States is going broke, [and] …that radical reform of U.S. fiscal institutions is essential to secure the nationТs economic future.” Failure to engage in these massive reforms will inevitably result in the financial demise of the United States, Kotlikoff says: “[W]e have a country at the end of its resources. ItТs exhausted, stripped bear, destitute, bereft, wanting in property, and wrecked (at least in terms of its consumption and borrowing capacity) in consequence of failure to pay its creditors. In short, the country is bankrupt and is forced to reorganize its operations by paying its creditors (the oldsters) less than they were promised.”

We might possibly be saved, he explains, if the nation engages in massive, radical reform in three areas: 1) Eliminating the current income tax system and moving to a national retail sales tax of 33 percent. 2) Privatizing social security so that workers own their savings accounts and the federal government can no longer swipe funds from Social Security. 3) Launching a national health insurance program that covers everyone and relies on a system of government-issued vouchers that citizens can spend with health insurance companies.

These radical reforms are necessary because the future gap between what the government owes and what it stands to receive in revenues is already monstrously large, and it’s growing by the minute. This gap, called the Gokhale and Smetters measure, currently stands at an astonishing $65.9 trillion. (Yes, with a “T”.) As Kotlikoff explains, “This figure is more than five times U.S. GDP and almost twice the size of national wealth. One way to wrap oneТs head around $65.9 trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143 percent.”

If you read that last paragraph with any presence of mind, you now begin to understand the magnitude of the fiscal problem facing the United States. It could be solved, as explained above, by doubling all personal and corporate income taxes. But then what’s the point in working? It could also be solved by slashing promised benefits in Social Security and Medicare. But what about the inevitable street riots?

None of these solutions are likely to occur. And that leaves the Ace up the sleeve. It’s the Ace that all government eventually play on their way to bankruptcy and collapse, and it’s the Ace that the United States will ultimately be forced to play, too: hyperinflation. The U.S. will have to print more money to escape the financial consequences of its unbridled spending.

Hyperinflation is inevitable

As Kotlikoff explains: “Given the reluctance of our politicians to raise taxes, cut benefits, or even limit the growth in benefits, the most likely scenario is that the government will start printing money to pay its bills. This could arise in the context of the Federal Reserve Уbeing forcedФ to buy Treasury bills and bonds to reduce interest rates. Specifically, once the financial markets begin to understand the depth and extent of the countryТs financial insolvency, they will start worrying about inflation and about being paid back in watered-down dollars. This concern will lead them to start dumping their holdings of U.S. Treasuries. In so doing, theyТll drive up interest rates, which will lead the Fed to print money to buy up those bonds. The consequence will be more money creationЧexactly what the bond traders will have come to fear. This could lead to spiraling expectations of higher inflation, with the process eventuating in hyperinflation.”

It’s not like it hasn’t happened before. Hyperinflation is actually the norm, not the exception, and it’s the escape route taken by virtually every country suffering under the burden of payment promises is cannot possibly keep. Whether we’re talking about Germany after World War I, or the United States over the next few years, hyperinflation is the only option remaining for politicians who refuse to practice fiscal sanity.

No politician ever got elected by promising voters their entitlements would be halted, did they? Political popularity is derived from promising voters precisely what the nation cannot afford: Endless entitlements and runaway spending without apparent consequence.

The China factor

The only thing keeping the U.S. afloat right now is the temporary willingness of Asian countries to keep buying U.S. debt, thereby pumping up the U.S. economy with dollars earned on the backs of Chinese laborers. But even the Chinese — known for their tolerance of hard times and manual labor — may eventually tire of lending money to a posh, arrogant Western nation that has all but abandoned the concept of saving money. Says Kotlikoff, “China is saving so much that itТs running a current account surplus. Not only is China supplying capital to the rest of the world, itТs increasingly doing so via direct investment. The question for the United States is whether China will tire of investing only indirectly in our country and begin to sell its dollar-denominated reserves. Doing so could have spectacularly bad implications for the value of the dollar and the level of U.S. interest rates.”

By “spectacularly bad implications,” Kotlikoff means the value of the U.S. dollar would plummet, the level of U.S. interest rates would skyrocket, and hyperinflation would be well underway. U.S. citizens would find not only their dollars to be near-worthless on the global market, but their savings to be all but wiped out as well. Sure, you’ll still have the same number of dollars in your bank account, but they won’t be worth anything.

This is what eventually happens, by the way, when a government eliminates the gold standard and separates its currency from precious metals. The U.S. dollar, a green piece of paper, technically stands for nothing other than the U.S. government’s promise to pay. But when push comes to shove, the government will have no choice but to hyperinflate its way out of financial obligations, thereby rendering all currently-held U.S. dollars to be virtually worthless. Those investors or citizens who hold savings in U.S. dollars will be wiped out by a government that will essentially steal their wealth without having to snatch a single physical dollar from their hands.

Future obligations cannot be met

And yet, despite the seriousness of the U.S. fiscal situation, Americans and their elected representative live their merry lives oblivious to financial reality. National newspaper headlines even add to the denial, running headlines that claim the nation’s economy is strong because the 2006 budget deficit will be “only” $296 billion. That this is considered a success by the Bush Administration is testament to the psychotic fiscal self-deception that now serves as the norm in the United States. It’s like a family that owes $1 million on a $200,000 home announcing “success” because it has just reduced its monthly credit card borrowing from $15,000 to $12,000. And that’s if you actually believe the numbers, because if there’s one area where Washington has proven its skill, it’s the expert deployment of smoke and mirrors on all things involving numbers.

Cutting the annual budget deficit won’t save us anyway. It only means that we’re barreling head-first into a brick wall at a slightly slower pace than before. The entitlements will still come due:

“There are 77 million baby boomers now ranging from age 41 to age 59. All are hoping to collect tens of thousands of dollars in pension and healthcare benefits from the next generation. These claimants arenТt going away. In three years, the oldest boomers will be eligible for early Social Security benefits. In six years, the boomer vanguard will start collecting Medicare. Our nation has done nothing to prepare for this onslaught of obligation. Instead, it has continued to focus on a completely meaningless fiscal metricЧУtheФ federal deficitЧcensored and studiously ignored long-term fiscal analyses that are scientifically coherent, and dramatically expanded the benefit levels being explicitly or implicitly promised to the baby boomers.”

The result of this is not in question: The United States government is already running on fumes, and in a few more years, it will suffer financial collapse.

“Countries can and do go bankrupt,” says Kotlikoff, and the U.S. is no exception to the laws of economic reality.

Oblivious to what’s coming

The American people, as usual, remain oblivious to the financial future that awaits them. Even as the housing bubble is now beginning to burst in the nation’s most overpriced real estate markets, most people don’t have a clue what “hard times” really means. To today’s debt-ridden yuppie spenders, “hard times” means shuffling six different credit card accounts to cover the payments on an overpriced house, two new SUVs in the driveway and a vacation to Paris, none of which the yuppie couple can afford. The idea of ever having to pay back their debt and live within their means is as foreign to most Americans as it is their own government. Financial consequences have been put off so habitually, for so long, that people forget they even exist. And thus the reality awakening becomes ever more rude when it finally appears. To say that most Americans will be in a state of shock when their life savings are suddenly wiped out is an understatement: These people will have never even imagined such an event is possible, much less contemplated how it might affect them.

Rome is burning

It’s too late to save the United States from its financial meltdown, I believe. For starters, there is a complete lack of willingness to make tough financial decisions and begin paying off the national debt. Such an idea is so foreign to the U.S. that no presidential candidate in the last two decades has even seriously proposed such a plan, save perhaps Ross Perot, a man with such well-grounded ideas of cutting government spending that he was immediately branded a crackpot by the status quo. Even worse, there’s not even recognition among the masses that a financial problem exists. As long as the President continues to proclaim the economy is in good shape, and the press remains complicit with its printing of economic half-truths, few will recognize any problem at all. Besides, any such recognition of the financial problems now facing this nation requires the observers to actually be able to do basic math. Our public education system, which is now largely considered institutionalized day care for nutritionally-deficient children, has seen to it that mathematics instruction never gets in the way of diagnosing children with Attention Deficit Hyperactivity Disorder and drugging them up on amphetamines so powerful that they actually have a street value as recreational drugs.

Thus, few young Americans can even do math. And none of them lived through the Great Depression, nor did they understand the study of it in school, meaning they are precisely the kind of naive, overconfident yuppie spenders who are ripe for being financially obliterated by an economic meltdown. When their ignorance turns to fear, the ever-widening spiral of financial panic becomes unstoppable until the whole system hits rock bottom. And “rock bottom” is far, far below the relatively luxurious lifestyle to which American consumers have become so smugly accustomed.

Protecting yourself from the inevitable

The timetable for this economic collapse is unknown, but it’s very unlikely to happen in the next year or two. A collapse by 2012 is certainly possible, and seeing it by 2020 is almost certain. That leaves the more intelligent among us plenty of time to prepare. But the usual preparatory actions by Americans won’t suffice in such a large-scale collapse. FDIC-insured banks, for example, will almost certainly collapse and take the DFIC down with them. Even if you are repaid by the FDIC, you’ll only be paid in worthless U.S. dollars anyway.

Beating the odds on this financial hurricane requires exceptional planning and preparedness. I’ll publish practical solutions and strategies on this website in the months and years ahead. If you’d like to stay informed, subscribe to the free NewsTarget email newsletter (see below) and make sure you select either “All topics” or the “CounterThink” topic.

As a subscriber, you’ll receive an email alert when I publish new solutions to the coming financial crisis that, according to many observers, now seems a foregone conclusion. Americans, it seems, are in for a rude awakening in the near future.